Raffles Medical Group - DBS Research 2020-02-25: Common Cold Not Flu

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RAFFLES MEDICAL GROUP LTD (SGX:BSL)

Raffles Medical Group - Common Cold Not Flu

• Raffles Medical's FY19 net profit fell 15% y-o-y, in line.
• Both healthcare and hospital services achieved good growth; +9% and +6% y-o-y respectively
• Chongqing hospital has obtained approval for Yibao; Shanghai hospital to open when COVID-19 situation stabilises
• Declared 2-Sct final dividend; FY19 full-year dividend of 2.5 Scts, flat y-o-y.

FY19 results impacted by start-up losses as expected.

• Raffles Medical (SGX:BSL)’s FY19 net profit fell 15% y-o-y to S$60m; in line with our FY19F estimates, mainly impacted by start-up losses from the newly opened Raffles Hospital Chongqing. FY19 EBITDA grew 2.8% y-o-y to S$105.4m despite the start-up losses which were mitigated by the changes arising from the adoption of FRS16.
• Excluding the start-up losses, FY19 EBITDA would have grown 11.8% y-o-y. The estimated amount of start-up losses for Raffles Hospital Chongqing was S$9.2m, at the middle of the estimated range given by management of S$8-10m.
• FY19 revenue grew 7% y-o-y mainly from both healthcare services (+9% y-o-y) and hospital services (+6% y-o-y). The increased revenue in Healthcare Services division was attributed to an increase in corporate clients and greater scope of services for existing and new insurance contracts. The Hospital Services division’s revenue growth was contributed by patient growth.
• FY19 EBITDA margin fell 0.8ppt to 20.2% (21% in FY19). Excluding the start-up losses and the impact from the adoption of FRS16, EBITDA margin is estimated to be relatively stable y-o-y. Similarly, 4Q19 net profit fell 15% y-o-y to S$19m as 7% y-o-y revenue growth was offset by start-up losses. 4Q19 EBITDA grew 7% y-o-y mainly led by the changes arising from the adoption of FRS16.
• 4Q19 EBITDA (ex start-up losses) is estimated to have increased 15% y-o-y. The estimated start-up cost fell by 3.6% q-o-q to S$2.5m vs S$2.6m in 3Q19, S$2.3m in 2Q19 and S$1.8m in 1Q19.
• Raffles Medical declared final dividend of 2 Scts, flat y-o-y. Total FY19 full-year dividend amounts to 2.5 Scts, flat y-o-y.
• Raffles Medical will adopt the half-yearly reporting in FY2020 with business updates to be disclosed when necessary.

Key updates

COVID-19 impacts traffic at clinics and delays elective treatment / surgeries.

• As expected, Raffles Medical has seen slower traffic especially at its clinics following the COVID-19 outbreak. However, it saw a significant rise in the utlisation of RafflesConnect, Raffles Medical’s teleconsult. At the hospital, elective treatments/surgeries have also been delayed. In China, the medical clinics were impacted with some closures while Raffles Hospital Chongqing continued its operations. As of to-date, management says that most of its clinics have reopened.
• Drawing from its experience gained during SARS, management estimates a 6% impact on its top line should COVID-19 persist for two quarters (1H20), largely from its Singapore operations. Nevertheless, management believes that healthcare will remain resilient and demand should return when the COVID-19 situation is resolved.

Raffles Hospital Chongqing has obtained approval for Yibao.

• Raffles Hospital Chongqing has obtained approval to be one of the designated hospitals covered by China’s social health insurance scheme (Yibao). With the approval, local patients are able to claim medical expenditures incurred at Raffles Hospital Chongqing from Yibao while they can top-up the difference with private insurance and/or out-of-pocket.

Raffles Hospital Shanghai to open when the city returns to normalcy.

• Raffles Hospital Shanghai is ready to open by 2Q20. However, given the COVID-19 situation, management has decided to commence operations when Shanghai returns to normalcy.

A fifth executive health screening centre opened at Waterway Point.

• Raffles Medical added its fifth executive health screening centre at Waterway Point.

Maintain HOLD rating; Target Price of S$1.12.

• We maintain our HOLD rating but lower our Target Price to S$1.10 from S$1.12. We trim our FY20F/21F estimates by 3% to 6% to factor in the delayed opening of Raffles Hospital Shanghai offset by some impact from slower demand in 1H20 following the COVID-19 outbreak.
• Raffles Medical’s share price is currently at 28-33x FY20F-21F PE (at 1 standard deviation [SD] above historical average) and 20-23x FY20F-21F EV/EBITDA.
• See Raffles Medical Share Price; Raffles Medical Target Price; Raffles Medical Analyst Reports; Raffles Medical Dividend History; Raffles Medical Announcements; Raffles Medical Latest News.
• While its share price may be at the upper band of its historical range, this is a result of a lower earnings base arising from gestation losses, which we believe is well expected by the market, and could already be priced in. As a result, we believe downside risks are limited.
• Potential re-rating catalysts are:
  1. better-than-expected ramp-up of new projects/integration process,
  2. stronger-than-expected earnings growth from existing operations, and
  3. further accretive acquisitions and/or JVs/strategic alliances for existing/future acquisitions of hospitals.

Rachel Lih Rui TAN DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2020-02-25

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.10 DOWN 1.120